Farmers in many areas of the United States, including several portions of southern Minnesota, are having a very good profit year in 2021. In the latest estimate, the USDA Economic Research Service is projecting total U.S. net farm income for 2021 at $113 billion, which is at the highest level since 2013. The higher levels of net farm income in 2021 are the result of better-than-average crop yields in many locations and the highest corn and soybean commodity prices since 2013, along with some extra government program payments early in the year. However, as we end the year, rapidly rising crop input costs for 2022 will likely increase crop breakeven costs, which could lead to much lower net farm income levels next year.
Almost every input expense for crop production will increase in 2022 compared to expense levels in 2021 and other recent years. Much of the focus has been in higher fertilizer costs for corn, which are expected to nearly double in 2022 compared to average 2021 fertilizer costs. However, input costs are also expected to be significantly higher for crop chemicals, diesel fuel, propane, repairs, custom work, and labor. As of late November, diesel fuel prices were 60 percent higher than a year earlier. About the only inputs not expected to show major increases are seed costs and crop insurance expense. The cost of farm equipment has also increased substantially from a year earlier, which will likely increase depreciation and other overhead costs for 2022.
Many types of fertilizer products are now at record price levels, which is likely to have a big impact on corn breakeven levels and could encourage more soybean acres next year. Several phosphate and potash fertilizer products have increased by 15-20 percent since late September, while the cost of anhydrous ammonia, urea and other nitrogen fertilizer products have increased by approximately 50 percent in the past two months. The rapid increase in fertilizer costs is being driven by high global demand, very tight supplies of many fertilizer ingredients, and by shipping issues at U.S. ports. Following are the prices for some types of fertilizer in late November of 2021 compared to a year earlier in 2020:
- Phosphate (MAP): $911 per ton compared to $488 per ton (87% increase)
- Potash: $769 per ton compared to $336 per ton (129 % increase)
- Dry Urea (Nitrogen): $859 per ton compared to $358 per ton (140% increase)
- Anhydrous (Nitrogen): $1,220 per ton compared to $571 per ton (114% increase)
- UAN32 (Nitrogen): $651 per ton compared to $249 per ton (161% increase)
Fertilizer expense typically accounts for about one-third of a corn farmers crop input costs; however, in 2022 that cost may rise to 45 percent or higher. An average corn fertilizer program in southern Minnesota is expected to cost about $250-300 per acre in 2022, as compared to an estimated $140 per acre in 2021 and $121 per acre in 2020, based on South Central College Farm Business Management data. The 2022 fertilizer costs will likely top the average fertilizer expenses of $194 and $191 per acre respectively for 2012 and 2013, which are the current highest average per acre fertilizer costs listed in the FBM records for southern Minnesota.
Land rent increases?
In addition to increases in fertilizer costs and some other crop input costs, most farmers will also likely face increases in land rental rates in 2022. Most experts expect 2022 cash rental rates in the Upper Midwest to increase by 10 percent or more, meaning that rental rates that were $225 per acre in 2021 will likely be $250 per acre or higher in 2022. However, there have also been reports of land rental rates topping $300 per acre or more in some areas. Many of these significantly higher land rental rates for 2022 are being based on above average 2021 corn and soybean yield levels, the higher grain prices that we have experienced in the last 12 months, and crop input expense levels from 2021 or earlier.
The combination of significantly higher crop input costs and increasing land rental rates is likely to put more pressure on crop breakeven price levels for 2022. Using typical crop input expenses, other direct costs, average overhead expenses, together with a land rental rate of $250 per acre and a targeted return to the farm operator of $50 per acre, the breakeven price to cover direct and overhead expenses for corn in 2022 would be approximately $5-5.50 per bushel. If the cash rental rate increases to $300 per acre, the breakeven price jumps to about $5.35-5.85 per bushel. This compares to corn breakeven levels of $3.75-4 per bushel in 2021. The breakeven soybean price to cover the cost of production and $250 per acre land rent would be about $11.50-12.50 per bushel, which would increase to about $12.50-13.50 per bushel at $300/acre land rent. This compares to soybean breakeven levels of $9-9.50 per acre in 2021.
Based on the monthly World Supply and Demand Report in November, USDA is estimating the U.S. average corn price for the 2021-22 year at $5.45 per bushel and the average 2021-22 soybean price at $12.10 per bushel. Crop price bids in south-central Minnesota in late November of 2021 for fall 2022 at local elevators and processing plants have been near $5 per bushel for corn and $11.50 per bushel for soybeans. This will likely be close to the breakeven level at crop insurance APH yield levels for many Upper Midwest farm operators. Many farmers are quite optimistic about crop prices going into 2022; however, commodity prices have been highly volatile in the past couple of years, so there is some uncertainty in the crop prices going forward.
Another way to look at the increases in fertilizer costs, cash rental rates and other crop inputs is to calculate how many bushels of corn or soybeans it will take to cover those expenses at various crop price levels. Based on data from the SCC FBM program, it is estimated that it will take approximately 64 bushels of corn to cover the input costs for seed, fertilizer and chemical in 2021. Based on data from the University of Minnesota FINBIN program, it took an average of 69 bushels of corn in 2020 and 73 bushels per acre in 2019 to cover these crop input costs.
It is estimated that it will take 85-90 bushels of corn at $5 per bushel in 2022 to cover the expected corn fertilizer cost of $275 per acre, as well as seed and crop protection costs. This jumps to 100-105 bushels per acre at a corn price of $4 per bushel. The last time we had the ratio this high was from 2014 to 2017 when it took 83-88 bushels of corn to cover crop input costs. These years were represented by fairly moderate fertilizer costs but much lower average corn prices than we have at the present time. If a land rental rate of $275 per acre is included with the estimated crop input costs for seed, fertilizer and crop protection for 2022, it would take 140-145 bushels of corn at a price of $5 per bushel and 175-185 bushels per acre at $4 per bushel to cover those expenses.
Farm operators need to be aware of the rapidly rising costs for fertilizer, crop protection, fuel and other crop inputs, as well as increases in land rental rates for 2022. Strategies to address these higher input costs include having a strategic fertilizer plan that optimizes return from the fertilizer investment and looking at ways to reduce other crop input expenses. Flexible land rental contracts that set reasonable base cash rental rates, which has the possibility of increasing at higher crop price levels, can also be a strategy to reduce risk during times of high input costs and uncertainty in crop prices. In addition, farmers need to have solid estimates for their cost of production so they can take advantage of forward pricing opportunities when corn and soybean prices are at profitable levels for the 2022 crop year.